The coronavirus pandemic has pushed the economy into a slowdown of unknown severity. It could be a long, drawn-out recession, or a sharp dip followed by a swift recovery.
The stock market, which has soared 23 percent from its low, is signaling that many investors expect a quick rebound.
But that optimism will be tested over the coming weeks when large companies report their quarterly financial results for the first three months of the year and predict the pandemic’s effect on their business.
“Earnings season,” as it’s known on Wall Street, usually fascinates only professional investors. And corporate executives, always reluctant to discuss problems, may be even less forthcoming about them now. But with millions of jobs on the line and businesses shuttering every day, this deluge of company information, and any light it sheds, will take on a new importance.
Investors are already anticipating several epicenters of economic pain. Oil companies, airlines, hotels, restaurants, retailers and automakers will report steep losses and issue forecasts for the coming months. Ford Motor, for example, said on Monday that it would lose $600 million in the first quarter — not counting some expenses like interest and taxes — down from a $2.4 billion profit in the first three months of 2019.
Companies in these sectors are furloughing or laying off employees. It’s here that government aid could prove decisive — and executives, speaking on publicly accessible earnings calls, may reveal whether they will apply for assistance from the Treasury Department and the Federal Reserve, and how much.
Some companies may be hesitant to take a big bailout. Giving the government stock in return for its financial support could rattle shareholders, who might fear that the government stake would reduce their ownership share of the company. But companies that spurn the government’s help or take too little may later regret it if their fortunes deteriorate further. Executives at Boeing, for example, have sent mixed messages about whether it needs help from the government. The aerospace giant was already in trouble before the pandemic because of the grounding of the 737 Max.
And while accepting a government bailout could help, there is no guarantee that executives will maintain hiring at pre-pandemic levels. Some types of aid might come with commitments to keep people employed, but only until the end of September. United Airlines, for example, has suggested that layoffs may come after September if the economy stays in a deep funk.
What to watch for: Clarity from Boeing on whether it will seek government assistance and be willing to give equity or something else to the government in exchange.
A Reality Check on the Stock Rally
If earnings disappoint investors and management’s forecasts are worse than expected or disconcertingly vague, share prices could plunge back toward their recent lows. That would add to the gloom about the economy and cast doubts on the government’s ability to revive the economy.
But some investors believe earnings season could provide evidence that a swift recovery is possible. “We are viewing this as very much transitory,” said Timothy Fidler, who helps manage money at Ariel Investments, “a deep, unprecedented shock, but one that will cure itself — and cure itself pretty rapidly.”
Such bullishness from investors might seem irrationally exuberant when states like New York are still reporting hundreds of deaths a day. But traders make money when they accurately predict the future. And sometimes, their optimism can also help lift the economy. That’s because when corporate executives see stocks surge and borrowing costs plunge, they might be less likely to cut back on spending and hiring as much as when stocks are slumping.
What to watch for: If stocks sell off steeply, look to see which big companies reported that day and what their executives said.
The Banks Are Really Important
This week, the six largest U.S. banks report their earnings. Banks play a crucial role in the economy because they help finance spending by companies and individuals. In the past few weeks, they have already lent billions to companies that drew down credit lines to ensure they had sufficient cash.
If bank executives fear that a recession will make it harder for borrowers to pay back loans, they will not lend as much money in the coming months, which would, in turn, further weaken the economy. On Tuesday, JPMorgan Chase said that it set aside $8 billion in anticipation of loan losses to come, and Wells Fargo $4 billion.
One worrying sign: Bank stocks are down by over a third this year, versus a 14.5 percent drop for the S&P 500. That means investors expect the sector will be hit harder than others.
It is important that the banks stay healthy because the federal government is relying on them as a middleman to get potentially trillions of dollars of aid to companies and individuals.
What to watch for: Comments from bank executives that they are going to be more cautious about making loans.
Which Companies Are Adapting to a New Reality
It’s no surprise that the virtual lockdown of large swaths of the American population has delivered a big blow to the economy, which is driven by consumer spending. But investors are intensely interested in whether traditional retailers and restaurants will be able to survive and adapt to potentially huge changes in consumers’ spending priorities.
Some companies will offer important insights about what Americans are spending on and what they are not. For instance, the Walt Disney Company has been keen to highlight surging subscriptions for its Disney Plus streaming service, which have already topped 50 million worldwide in a few months. But it is not clear that the growth of that service can offset the collapse of key money makers such as theme parks, cruise ships, ESPN and movies. Some analysts, such as those at JPMorgan, see “only some lingering impact to attendance at the parks” because of the outbreak.
Of course, there will be outright winners. Share prices for Netflix, Amazon and Clorox, the maker of disinfecting wipes and bleach, are all up by more than 15 percent this year.
But it might take time to tell whether others will do well. And even in industries that are hammered by the outbreak, some companies might do better than others. In the restaurant industry, for example, some chains are more likely to thrive when most diners are not leaving home much or at all. Chains with an established takeout and delivery business, such as Domino’s and Papa John’s, are growing fast with the help of online ordering, while other fast-food companies that are heavily dependent on business from commuters, like Dunkin’ Brands, might struggle. They may need to change how they do business if many people keep working from home for months.
What to watch for: Comments that corporate executives make about how consumer behavior is changing, and whether those changes could outlast the pandemic.